Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County No. BC394851, Susan Bryant-Deason, Judge.
The Yarnall Firm and Delores A. Yarnall for Plaintiff and Appellant.
Nemecek & Cole, Jonathan B. Cole, Mark Schaeffer, and David B. Owen for Defendants and Respondents Joel R. Bennett and Bennett & Fairshter.
Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg, Joel E. Boxer, and Bonita D. Moore for Defendant and Respondent Dykema Gossett.
BIGELOW, P. J.
Robert Baker (appellant) sued his former legal counsel for alleged malpractice in their representation of him in an arbitration before the National Association of Securities Dealers, Inc. (NASD). The defendants demurred to Baker’s complaint on the grounds that it failed to state a claim and was barred by collateral estoppel. The trial court sustained the demurrer without leave to amend. We reverse the trial court judgment.
BACKGROUND
We incorporate some of the background from the summary in the unpublished opinion issued by Division Two of this court in the proceeding underlying appellant’s instant legal malpractice action. (Baker v. American Express Financial Advisors, Inc. (Jan. 29, 2008, B193400) [nonpub. opn.].) We also granted appellant’s request for judicial notice of several volumes of materials that were filed in the appeal in the underlying action. Although we find much of the material irrelevant to our determination in this case, we rely on a few of the submitted documents solely to explain the procedural history of the underlying proceedings.
I. The Underlying Arbitration and Trial Court Proceedings
In 2002, appellant filed a complaint against American Express Financial Advisors, Inc., and financial advisor Stanley Cohen (collectively American Express) alleging causes of action for breach of contract, breach of fiduciary duty, conversion, fraud, and violation of the Elder Abuse and Dependent Adult Civil Protection Act (Welf. & Inst. Code, § 15600 et seq.). Appellant alleged he opened an American Express account through Cohen and funded the account with his own monies. According to appellant’s complaint, the account bore his mother’s name as trustee of the “Robert Baker Trust, ” but Cohen did not possess any trust documents. The action was filed after appellant’s mother died. Appellant alleged that when he asked American Express to transfer the account assets to him following his mother’s death, it declined to do so in the absence of trust documents, and additionally that Cohen refused appellant’s request to convert the trust assets to cash. Earlier in 2002, appellant had settled litigation he initiated against his mother’s estate and his brothers regarding various assets.
American Express filed a petition to compel arbitration of appellant’s complaint. In October 2002, the trial court granted the petition and the matter proceeded to arbitration before the NASD. Appellant was represented by attorney Joel Bennett and the law firm Bennett & Fairshter. In April 2003, American Express filed an answer to appellant’s arbitration complaint and a motion to dismiss, in part on the ground that appellant did not have standing to bring the claims alleged. In December 2003, the arbitration panel denied the motion to dismiss. In October 2005, American Express filed a motion to bifurcate, in which it requested that the arbitration panel first decide the threshold issues of whether appellant’s claims were barred by an earlier settlement agreement or because he did not have standing to bring the claims.
In November 2005, the arbitration panel issued an award which stated:
“After considering the pleadings and testimony presented at the pre-hearing conference held on November 22, 2005, the Panel decided in full and final resolution of the issues submitted for determination as follows: [¶] 1. Pursuant to Rule 10305(a) of the [NASD Code of Arbitration], Claimant’s claims are dismissed in their entirety and the parties are directed to their judicial remedies without prejudice to any claims or defenses available to any party. [¶] 2. The parties shall bear their respective costs, including attorney’s fees. [¶] 3. All other relief requested and not expressly granted, including Claimant’s request for punitive damages, is denied.”
Rule 10305(a) of the NASD Code of Arbitration provides: “At any time during the course of an arbitration, the arbitrators may either upon their own initiative or at the request of a party, dismiss the proceeding and refer the parties to their judicial remedies, or to any dispute resolution forum agreed to by the parties, without prejudice to any claims or defenses available to any party.”
In January 2006, appellant moved for a trial de novo in the superior court on the ground that the arbitration panel did not decide the case on the merits. He also filed a motion to vacate the dismissal or, alternatively, to vacate the arbitration award and have his claims heard by a new arbitration panel. American Express opposed both motions and contended the arbitrators had accepted its arguments that appellant lacked standing and that the earlier settlement agreement barred his claims. American Express asserted the arbitration award disposed of appellant’s claims on the merits. Counsel for both sides filed competing declarations with contradictory recollections of the arbitration prehearing conference and differing interpretations of the arbitration award. Appellant’s counsel declared the arbitration panel indicated in the prehearing conference that it was not equipped to handle the issues before it and the case involved matters that were more appropriately heard in the superior court. They further declared the panel did not reach the merits of appellant’s claims.
By this time, Bennett and Bennett & Fairshter were no longer representing appellant. However, they submitted declarations attesting to their recollections of the arbitration proceedings.
In June 2006, the trial court denied appellant’s motions and confirmed the arbitration award. The court concluded a request for a trial de novo applied only to judicial arbitration, not contractual arbitration, thus appellant’s request was ineffective. The court further found the arbitration panel considered the issues of standing and the effect of the prior settlement, decided the issues in American Express and Cohen’s favor, and accordingly dismissed all of appellant’s claims.
Appellant appealed the trial court ruling. In January 2008, Division Two of this court affirmed the trial court judgment. With respect to whether the arbitrator’s award was intended to allow appellant to pursue his claims in the trial court, the appellate court applied a substantial evidence standard of review in light of the conflicting evidence the parties had submitted to the trial court. The appellate court found substantial evidence supported the trial court’s conclusion that the arbitrators intended the arbitration award to fully and finally dispose of appellant’s claims.
II. The Instant Action
In July 2008, appellant filed a complaint for legal malpractice against Bennett, the law firm Bennett & Fairshter, and the law firm Dykema Gossett (collectively respondents). In October 2008, appellant filed a second amended complaint (the complaint). The complaint alleged respondents’ failure to exercise reasonable care and skill resulted in the dismissal of appellant’s arbitration claims. The complaint also alleged respondents failed to comply with the standard of care in prosecuting appellant’s claims by, “among other things, not requesting a modification or clarification of the Arbitrators’ Award... to reflect the fact that the Arbitrators found that the arbitration was an improper forum to resolve Plaintiff’s claims and that all of Plaintiff’s claims were to be litigated in the Superior Court.” The complaint asserted appellant had a meritorious claim that he lost as a result of respondents’ actions.
According to the malpractice complaint, Bennett was a partner at Bennett & Fairshter while he was representing appellant, but he subsequently became an agent, employee, or partner of Dykema Gossett.
Respondents demurred to the complaint. They argued collateral estoppel prevented appellant from pleading that he would have obtained a better result but for respondents’ malpractice “since he lost the underlying action because he did not have standing to maintain that action.” The trial court sustained the demurrer without leave to amend. In a minute order, the court explained: “Court finds the Plaintiff failed to allege sufficient facts to constitute a cause of action for legal malpractice since he has failed to show that the case was dismissed by the arbitration award due to any negligence on the part of the Defendants. Further, Plaintiff’s cause of action for legal malpractice against the Defendants is barred by the doctrine of collateral estoppel. The Court of Appeal and the trial court in the underlying action already reviewed the arbitrator’s decision in dismissing the action and as such, Plaintiff’s request for the Court to review the arbitrator’s decision is improper.”
This appeal timely followed.
DISCUSSION
I. Collateral Estoppel Did Not Bar Plaintiff’s Malpractice Complaint
A. Applicable Legal Principles
i. Standard of Review
“In reviewing the sufficiency of a complaint against a demurrer, we ‘treat[] the demurrer as admitting all material facts properly pleaded, ’ but we do not ‘assume the truth of contentions, deductions or conclusions of law.’ [Citation.] We liberally construe the pleading to achieve substantial justice between the parties, giving the complaint a reasonable interpretation and reading the allegations in context. [Citations.] When a demurrer is sustained, we must determine de novo whether the complaint alleges facts sufficient to state a cause of action under any legal theory. [Citation.] Moreover, when a demurrer is sustained without leave to amend, we also must determine whether there is a reasonable possibility that the defect can be cured by amendment. [Citation.]” (Martorana v. Marlin & Saltzman (2009) 175 Cal.App.4th 685, 692-693 (Martorana).)
ii. Legal Malpractice
“To state a cause of action for legal malpractice, a plaintiff must plead ‘(1) the duty of the attorney to use such skill, prudence, and diligence as members of his or her profession commonly possess and exercise; (2) a breach of that duty; (3) a proximate causal connection between the breach and the resulting injury; and (4) actual loss or damage resulting from the attorney’s negligence.’ ” (Martorana, supra, 175 Cal.App.4th at p. 693, citing Coscia v. McKenna & Cuneo (2001) 25 Cal.4th 1194, 1199.) “To show damages proximately caused by the breach, the plaintiff must allege facts establishing that, ‘but for the alleged malpractice, it is more likely than not the plaintiff would have obtained a more favorable result.’ [Citations.]” (Charnay v. Cobert (2006) 145 Cal.App.4th 170, 179.)
B. Collateral Estoppel Based on the Previous Finding that Appellant Did Not Have Standing
Respondents have argued below and on appeal that collateral estoppel bars appellant from litigating whether respondents committed actionable malpractice because there has already been a finding that he did not have standing to pursue his arbitration claims. We disagree.
Respondents significantly mischaracterize the trial court and appellate court rulings in the underlying proceeding. Respondents repeatedly assert the Court of Appeal “determined” appellant did not have standing to sue American Express. This is inaccurate. At most, only the NASD arbitration panel actually considered respondents’ arguments on standing on their merits. The trial court subsequently determined only whether the arbitration panel had made such a decision. It did not independently consider or decide whether appellant had standing to sue American Express. Similarly, the appellate court’s only role was to determine whether substantial evidence supported the trial court’s decision that the arbitration panel considered and decided the standing issues. The Court of Appeal did not independently determine whether appellant had standing, nor did it affirm a trial court decision independently concluding appellant did not have standing.
“The doctrine of collateral estoppel provides that a party to an action, or one in privity with a party, is barred from subsequently relitigating issues actually litigated and finally decided in a prior proceeding. [Citation.] ‘ “Traditionally, collateral estoppel has been found to bar relitigation of an issue decided at a previous proceeding ‘if (1) the issue necessarily decided at the previous [proceeding] is identical to the one which is sought to be relitigated; (2) the previous [proceeding] resulted in a final judgment on the merits; and (3) the party against whom collateral estoppel is asserted was a party or in privity with a party at the prior [proceeding].’...” [Citations.]’ [Citation.] Apart from the threshold requirements, a court must consider the public policies underlying the collateral estoppel doctrine to determine if the facts of the case merit its application. [Citation.]” (Martorana, supra, 175 Cal.App.4th at p. 694.)
It is clear from the first factor above that collateral estoppel does not bar appellant’s malpractice claims. By alleging respondents committed malpractice, appellant’s argument is not that he actually had standing to bring the claims he alleged in the arbitration and therefore the arbitrators incorrectly decided the issue. Instead, the malpractice contention is that respondents’ actions or omissions led to the finding on standing and, had respondents acted within the standard of care, the arbitrators would more likely than not have reached a different conclusion. Whether respondents’ actions were negligent has not and could not have been litigated previously.
We agree with appellant that Ruffalo v. Patterson (1991) 234 Cal.App.3d 341 (Ruffalo) is instructive. In Ruffalo, the plaintiff sued her former counsel for malpractice arising out of a marital dissolution action. According to the plaintiff’s malpractice complaint, in the dissolution action the plaintiff’s counsel advised her to characterize certain property as community property. However, when the plaintiff retained new counsel, she contended she had a separate interest in the property. (Id. at p. 343.) The trial court found the property to be community property. In plaintiff’s subsequent malpractice action, she alleged the trial court would not have found the property to be community property had her counsel properly advised her of her separate interest in the property. (Ibid.) The trial court granted summary judgment on the ground that collateral estoppel barred the plaintiff from relitigating the character of the challenged property. (Ibid.)
The reviewing court reversed the grant of summary judgment, explaining: “The sense of this legal malpractice case is plaintiff’s claim that she was precluded by her attorney’s negligence from fully and fairly litigating the character of the [challenged] property in the previous dissolution action. Moreover, she does not seek a redetermination as to the character of the property; rather, she seeks to recover for her attorney’s alleged negligence in instructing and causing her to characterize the property as community property in the dissolution action. Her contention is that the court’s decision therein would have been different absent the negligence of her attorney, who is the defendant in this action. [¶] To hold otherwise would be to rule that where an attorney’s negligence has caused a court to make an erroneous adjudication of an issue, the fact that the court has made that adjudication absolves the attorney of all accountability and responsibility for negligence. That cannot be and is not the rule. The doctrine of collateral estoppel does not apply. [Citations.]” (Ruffalo, supra, 234 Cal.App.4th at p. 344.)
Similarly, in Garcia v. Borelli (1982) 129 Cal.App.3d 24 (Garcia), the reviewing court found collateral estoppel did not apply to bar a claim alleging malpractice in a probate context. The plaintiffs alleged the defendant attorney was negligent in his advice to the decedent, which eventually led to the estate being deprived of a community interest in a particular property. (Id. at p. 28.) Following a separate probate action which was eventually settled, the plaintiffs sued the decedent’s counsel for malpractice. (Id. at p. 29.) The defendant attorney alleged in a summary judgment motion that collateral estoppel barred the plaintiffs from relitigating their entitlements under the decedent’s will. (Ibid.) The Court of Appeal concluded collateral estoppel did not bar the plaintiffs’ claims. The court noted that while the plaintiffs’ action involved the contents of the decedent’s will as drafted, it did not seek further recovery from the estate, and did not seek to modify the settlement or judgment entered in the probate court proceedings. (Id. at p. 32.) The attorney’s alleged misconduct could not have been litigated in the probate court proceeding, and the attorney was not and could not have been a party in the probate proceeding. Collateral estoppel did not bar the malpractice claim.
The Ruffalo and Garcia courts’ reasoning is equally applicable in this case. Appellant contends the outcome of the underlying litigation would have been different absent the negligence of respondents in failing to make additional arguments to establish his standing. Because of the nature of legal malpractice cases which require case-within-case determinations, there will often be some overlap of issues between the malpractice action and the underlying proceeding. But as Ruffalo and Garcia demonstrate, despite such overlap, the same issue is not being litigated. The central purpose of appellant’s malpractice action is not to challenge the existing judgment against him. Instead, appellant claims his attorneys acted below the standard of care thereby setting off a chain of events that resulted in an unfavorable decision against him on the substantive issues in the underlying action. The malpractice action requires that appellant establish what would have happened in the underlying proceedings had his attorneys not been negligent. This is permissible.
We note respondents fail to cite a single legal authority that applies collateral estoppel to bar legal malpractice claims in the way respondents contend the doctrine applies here.
We consider however, whether the complaint adequately pled this theory. As the complaint currently stands, it broadly alleges respondents failed to exercise reasonable care and skill in representing him, resulting in the dismissal of the arbitration, and that respondents failed to comply with the standard of care in prosecuting the arbitration claims. These are broad legal conclusions rather than facts. The only actual facts alleged concerned respondents’ failure to seek clarification or modification of the arbitration award. However, at the trial court hearing on the demurrer, appellant’s counsel argued the alleged malpractice concerned more than the failure to clarify the arbitration award. He contended respondents did not present proper evidence to the arbitrators on standing, including evidence that would have established appellant was a trustee as well as a beneficiary of the trust account. Likewise, on appeal, appellant contends respondents additionally acted below the standard of care by not presenting evidence that he had standing under the Elder Abuse Act and as an individual and successor trustee with respect to his claims against Cohen for fraud, forgery, and conversion. (Smith v. State Farm Mutual Automobile Ins. Co. (2001) 93 Cal.App.4th 700, 711 (Smith) [plaintiff may demonstrate complaint may be amended to allege a cause of action for the first time on appeal].)
Appellant’s complaint would state a claim if amended to allege that respondents negligently failed to present evidence to the arbitrators that would have established alternative bases for standing. Because there was a reasonable possibility appellant could amend his complaint to sufficiently state a claim on the theory that respondents were negligent in failing to present evidence of standing to the arbitrators, the trial court abused its discretion in denying leave to amend. (Martorana, supra, 175 Cal.App.4th at p. 693.)
C. Collateral Estoppel as to the Theory that Respondents Should Have Clarified the Arbitrators’ Award
Similarly, we disagree that collateral estoppel bars appellant’s claim that his former counsel committed malpractice by failing to seek a clarification or modification of the arbitration award from the NASD arbitrators. Respondents contend that since the trial court found the arbitrators dismissed appellant’s claims on the merits, and the Court of Appeal upheld the trial court decision, appellant may no longer argue that a different result would have been achieved had respondents sought clarification or modification from the arbitrators themselves. Yet, appellant is not attempting to relitigate whether the arbitrator’s award decided his claims on the merits and dismissed them, or whether the award dismissed his claims without prejudice to his ability to pursue them in the trial court. Instead, appellant’s malpractice action seeks to litigate whether respondents breached their duty of care by not seeking clarification or modification of the arbitration award from the NASD panel.
Whether the result of the arbitration would have been different had respondents sought modification or clarification of the award from the arbitrators has not been litigated as such. The trial court interpreted the arbitration award, and the Court of Appeal affirmed the lower court ruling as supported by substantial evidence. While appellant can no longer challenge the trial court’s ruling, he may still attempt to prove that had respondents sought clarification or modification of the award from the NASD panel, a different result would have ensued, either within the arbitral forum itself, or at the trial court level. (See, e.g., Friedman v. Wheat First Securities, Inc. (S.D.N.Y. 1999) 64 F.Supp.2d 338, 342 [following NASD arbitration panel dismissal of arbitration, and at request of the parties and the district court, NASD panel issued a statement explaining the basis for its ruling].) As appellant has noted, respondents filed declarations in the trial court indicating their belief that the arbitrators had not decided appellant’s claims on the merits. If respondents’ recollections were accurate, seeking clarification from the NASD panel directly may have laid any controversy to rest.
Appellant may find it difficult to prove the claim that had his attorneys sought clarification or modification of the arbitration award from the NASD panel, the outcome of the arbitration or a subsequent trial court proceeding would more likely than not have been more favorable. As our Division Two colleagues concluded, substantial evidence supported a finding that the arbitration panel intended to dispose of appellant’s arbitration claims on the merits. But we are faced only with a demurrer; appellant need not prove his claims at this stage. It is enough that he has alleged facts which, if accepted as true, state a cause of action. (Smith, supra, 93 Cal.App.4th at p. 711 [in reviewing trial court order sustaining demurrer without leave to amend, “[w]e do not concern ourselves with whether the plaintiff will be able to prove the facts that he or she may allege in the complaint”].)
A similar situation arose in Pete v. Henderson (1954) 124 Cal.App.2d 487, in which the plaintiff’s attorney failed to file a timely notice of appeal. The plaintiff was forced to pay a judgment entered against him in the first action; he then filed a second action for legal malpractice. In the malpractice action, the trial court refused to hear evidence regarding the merits of the appeal in the first action on the ground that it would constitute a collateral attack on the judgment. (Id. at pp. 490-491.) As a result, the damages awarded to the plaintiff in the malpractice action did not include the amount of the judgment that was never challenged on appeal due to the attorney’s negligence. The reviewing court found evidence on the merits of the potential appeal would not have constituted a collateral attack on the judgment and the trial court erred in refusing to hear such evidence. The court noted the judgment in the first action was final and the purpose of the malpractice action was not to reverse the first judgment. But in the malpractice action, if the plaintiff could prove the judgment in the first case was erroneous and would have been reversed on appeal, he should have been permitted to do so. (Id. at p. 490.) Particularly relevant to the case at bar was the court’s following observation about its holding: “It is true that this result involves certain difficulties, not the least of which is to try and convince one trial judge that another judge of equal jurisdiction rendered such an erroneous judgment that it would have been reversed on appeal, had one been taken. But the fact that it may be difficult to make such proof is no ground to deny the right to present such proof if it can be made.” (Ibid.)
Thus, although appellant may face an uphill battle in proving that had respondents sought clarification or modification of the arbitration award from the NASD panel he would not have lost his claims, at this stage we accept the allegation as true. Appellant must be permitted to at least attempt to make such a showing.
In light of our conclusions above, we need not consider appellant’s alternative argument that Vandenberg v. Superior Court (1999) 21 Cal.4th 815 precludes nonmutual collateral estoppel in this case. Had appellant’s only legal theory of malpractice been that of respondents’ failure to adduce evidence in the arbitration of his additional bases for standing, we would affirm the trial court’s ruling sustaining the demurrer but reverse the order of dismissal and remand to allow appellant to amend his complaint. However, since we also conclude appellant’s complaint adequately pled a second viable legal theory, we must reverse the order sustaining the demurrer. A demurrer must be overruled if the complaint states a claim on any theory. (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 38-39.)
II. Judicial Notice
We need only briefly address the parties’ arguments regarding judicial notice. Appellant concedes it was not improper for the trial court to take judicial notice of the Court of Appeal opinion in the underlying decision and we agree. When ruling on a demurrer, the trial court may base its decision on matters outside of the pleading that are judicially noticeable. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) Court records are judicially noticeable. (Evid. Code, § 452, subd. (d).) The trial court in this case could properly take judicial notice of the Court of Appeal opinion to determine whether collateral estoppel applied.
However, appellant contends the trial court erred by taking judicial notice of the truth of the facts recited in the opinion. As we understand appellant’s argument, he contends the trial court accepted as true the earlier finding that appellant did not have standing, based on judicial notice. We disagree. Appellant’s argument confuses judicial notice and collateral estoppel. The trial court’s decision sustaining the demurrer resulted from a misapplication of collateral estoppel rather than an improper use of judicial notice. The trial court appeared to accept respondents’ argument that the issue of standing had already been decided in previous proceedings, thus appellant could not prove causation. This ruling employed judicial notice to acknowledge the rulings in previous proceedings, and then, as we have explained above, applied collateral estoppel where it should not have applied. In other words, the problem was the application of collateral estoppel, not judicial notice.
Finally, we previously granted respondents’ request for judicial notice of a complaint appellant has filed in federal court. Respondents argue the federal complaint reveals a statute of limitations defense. But other than making this assertion in the request for judicial notice, respondents have not provided us with any legal argument or authority to support the contention; indeed, it was not included in respondents’ brief on appeal. We treat the contention as forfeited. (Benach v. County of Los Angeles (2007) 149 Cal.App.4th 836, 852.) Of course, respondents will have the opportunity to raise a statute of limitations defense as the case proceeds in the trial court.
DISPOSITION
The trial court judgment is reversed. The demurrer is overruled. The trial court is directed to allow appellant to amend his complaint, if he chooses, to allege the additional theory of failing to present evidence of standing. Appellant is awarded his costs on appeal.
We concur: RUBIN, J., FLIER, J.